Largest Banks Rank Highest On Fed Risk Data

How risky are the biggest U.S. banks? That question is at the heart of a debate that has raged since the financial crisis, and it is central for policy makers deciding how big banks should be regulated. The Senate Banking Committee has called a hearing on the topic Wednesday.

Last month, the Federal Reservereleased new data shedding some light on how to answer that question. The Fed is the main U.S. agency in charge of keeping the financial system stable, so the Journal looked deeper the numbers.

The 33 largest U.S. banks with assets greater than $50 billion reported data on their “systemic footprint,” or the role they play in global financial markets each day. The Fed divides the data into five categories:

Size – How big is the bank?

Connections – How much of its dealings are tied to other financial firms?

Complexity – How much is it involved in derivatives and other activities outside ordinary banking?

Uniqueness – How difficult would it be for other firms to replace the bank?

Global reach – What are the extent of its international operations?

We took key data points from each of those five categories and ranked the banks relative to one another, providing a window into how the Fed could use the data to assess a bank’s risk. One takeaway: Larger banks tend to score higher on the metrics the Fed uses.

High ranks don’t necessarily mean the Fed thinks a bank is risky. For example, Fed officials could look at a bank’s market share – rather than simply its rank against peers – when assessing activities like derivatives trading or payment processing. It is also possible for small financial firms to engage in risky activities that endanger the financial system.

Here are the ranks, followed by a more detailed explanation of how they were calculated. You can find the original data in each bank’s “systemic risk” report by searching under the institution’s name on the Fed’s informational website.

We calculated each bank’s rank in the five categories by selecting data points from each of those categories in the report.

For instance, the “uniqueness” category includes three data points in our analysis: The amount of payments a bank has processed, the value of assets it holds as a custodian for other firms, and its total underwriting activity. J.P. Morgan Chase & Co. ranked first in payments (we gave it a score of 33 for that), second in assets held as a custodian (32), and first in underwriting (33). The average of those three- its “uniqueness score” – is 32.67. That was the highest “uniqueness score” among all 33 banks, so J.P. Morgan ranked first in that category.

Here is the full list of data points the Journal used:

Size: Total exposures.

Connections: assets and liabilities within the financial system, total securities outstanding.

Uniqueness: Payments activities, assets held as a custodian, underwriting activity.

Complexity: over-the-counter derivatives, trading and available for sale securities, and so-called “Level 3” assets whose value is hard to peg.

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